Deepening Japanese Financial Crisis

The Peoples' Star

The Japanese economy rushes on the road towards such an unprecedented
historical crisis as would remind many people of the Great Depression in the
1930s.

The burst of 'economic bubbles' in the early 1990s broke up the tale of the
so=-called 'perpetual prosperity of Japanese capitalism.' In order to save the
monopoly bourgeoisie from this crisis, the government poured huge funds from the
national finance, produced an artificial market for the monopoly bourgeoisie,
and made every effort to support stock prices and salvage those bad debt-ridden
banks with a record-low interest.

However the economic growth rate marked less than minus 10 percent in the
second quarter of 1997 for the first time in the past 32 years. Like this, all
the economic indexes show that the country is falling again into a deeper
over-production crisis without enjoying any sufficient recovery after the burst
of its 'economic bubbles'.

The auto, electric machines and other industrial makers ballooned their
exports, taking advantage of the low exchange rate of the yen against the
dollar. But now they are plagued with heaps of products in stock. The
investment, production and sales even in such growth industries as the
information and communications have already hit the ceiling. This why the
economy has shrunk in all industries.

It is true that a number of over-production crises have hit the Japanese
economy since the end of World War II, but this crisis is developing into a
catastrophic financial one. This represents the seriousness of the
contradictions and crises accumulated historically in the postwar capitalist
economy.

Since the collapse of the 'bubble economy,' the financial institutions have
gradually aggravated their crises. In July 1991 the Toho Mutual Bank fell into a
crisis to be merged and acquired by the Iyo Bank. Later, failures of the
financial institutions have increased year by year, while their sizes have
ballooned from credit associations and other smaller ones to the Hyogo Bank and
other relatively big banks. At the beginning, those financial institutions in
crisis were merged and acquired as measures for salvage, but later they broke
off their unprofitable sections and handed over their other business operations.
This way degrees of crisis have become deeper. In 1997 there were large
financial failures like Nissan Mutual Life Insurance Co. and Ogawa Securities
Co. Especially in November, we had a collapse of giant share companies and
banks.

The growth of the over-production crisis pushed down the stock prices again.
This heavily hit the management of those financial companies which had a great
deal of securities as assets. The Japanese financial firms are allowed to regard
as their 'latent assets' the balance between the purchase prices (on-the-book
prices) and the market prices (current prices) of the stocks. Including 45 per
cent of these 'latent assets in the equity capital, those companies have
achieved eight per cent of the return on equity (ROE) as the criterion set by
the Bank for International Settlements (BIS). They even have netted 'business
profits' to deal with their bad debts (some 100 trillion yen in total) through
several measures. For instance, they have used the 'latent assets' of stock and
land properties as capital, plundered the depositors and embezzled 'public
funds' through the lowest interest rate (The city banks borrow funds with
official interest rate of O.5 percent from the Bank of Japan and lend them with
interest rate of 4 to 5 percent, thus earning reportedly a profit margin of four
trillion yen a year). They have also invested in loans of the national and local
governments. The key Nikkei average of 225 selected stocks at the Tokyo Stock
Exchange once reached 39,000 yen at their peak, but it has declined to 16,000
yen level while some indexes predict a further decrease. This will not only
prevent the financial institutions from attaining the BIS criterion but also
reduce the funds for repayment of their bad debts and push down their credit
further internationally. Consequently, uncertainties about operations of
financial institutions have grown further.

This has invited a 'credit crunch' among financial companies in the short-
term money market (or call money market), resulting even in a collapse of big
financial business due to a 'stalemate in cash position.' The latest serial
bankruptcies are literally 'breaks in chains of credit.'

In the call money market, the financial companies borrow necessary funds
every day in preparation for withdrawals and repayments and pay them back next
day. The average balance of this market among banks reaches even 38 to 40
trillion yen. It supports the financing of those companies.

Nevertheless, uncertainties about the management of financial institutions
evoked withdrawals of individual depositors and the outflow of funds from the
stock market. This made the financial institutions short of cash for such
withdrawals.

The Sanyo Securities Co., which collapsed last November defaulted on loans in
the call money market. As this was the first in this market, it sharply pushed
up interest rates to aggravate 'credit crunch,' resulting in the bankruptcy of
the Hokkaido Takushoku Bank on November 17. Hokkaido Takushoku, which started in
1900 as an instrument for a national policy of settling the Hokkaido Island (the
second largest main island in Japan), was a bank designated by the Hokkaido
prefectural and other local governments, had transactions with 60 per cent of
all the companies in the prefecture and was one of the nation's 10 biggest
commercial banks. Its bankruptcy proved that the government had no choice but to
change the postwar financial policy, by breaking its public promise not to let
the nation's 20 largest banks go under. During the period of the 'bubble
economy,' Hokkaido Takushoku largely expanded its loans to middle-sized
construction companies and real estate firms. The burst of economic bubbles
resulted in huge bad debts of 930 billion yen according to its official
announcement (but the real amount is far bigger reportedly). Under the nose-dive
of share prices especially after early 1997, it drastically got caught in a
'financial crunch' and its request for fund procurement was rejected in the call
money market. After everything, it went bankrupt.

The Bank of Japan issued an exceptional official notice that there were no
more defaults ahead for financial businesses. Following Hokkaido Takushoku,
Yamaichi Securities Co. collapsed on November 24.

Yamaichi was a giant and core stock company of the Fuyo financial capitalist
group (one of the Big Six financial groups in Japan) consisting of Fuji Bank,
Yasuda Life Insurance, Marubeni, Nissan Motor and so on. And it was also one of
the nation's Big Four securities houses. Its deposited funds and securities
amounted to 24 trillion yen, while its total assets summed up to 3.15 trillion
yen with 7,500 employees, 117 local branches at home and so many associated
companies.

After the burst of 'economic bubbles,' its stock brokerage has declined
sharply. Like other stock businesses, Yamaichi incurred the hidden debts in
transactions called 'tobashi' and also the illegal compensation for losses of
big client companies, in order not to lose its customers. These illegal
transactions have brought the company more than 200 billion yen in off-the-book
debts which was just an amount announced officially by the company itself.
Actually, the real amount should be five or even ten times bigger than the
announced one. Its main bank refused new loans for fear of chain bankruptcy.
Finally, it went bankrupt, being burdened with debts to the tune of three
trillion yen.

On November 26, the Tokuyo City Bank Co. collapsed following Yamaichi.

Against such a background, the Bank of Japan flooded the call money market
with nearly four trillion yen. This way, it manages to prevent the chain
reaction of the credit collapse.

The retrench and crunch of credibility heavily hit smaller businesses at the
beginning and even big companies these days. This further deepens the
over-production crisis and then rebounds upon the financial crisis. Such a bad
circulation has started.

Besides, Japan is the 'biggest creditor' in the world, so its financial
bankruptcy will inevitably exert serious influence upon the Asian and US
economies and draw near a danger of global financial crisis.

The economic crisis in the Asian region was triggered by the monetary crisis
which started from Thailand. It has been drastically deepened, bringing even
South Korea into a serious financial crisis, a country which stands as the 11th
biggest economic power in the world.

The outstanding loans by the Japanese banks account for 20 per cent of all
those in the world market. Their borrowers are mainly in Asia and the U.S. If
fund supply from Japan to other Asian countries shrinks and if the Japanese
money refluxes from the US, the financial crisis in the Asian region will be
further aggravated and hit drastically the US economy, although the latter
enjoys now a boom under the 'bubble economy.' No one can deny the possibility
that it will develop into the biggest global financial crisis in post war
history.

The US as a ruler of the global capitalist economy fears spread of such a
financial crisis starting from Japan.

Nevertheless, it schemes in this critical period to dominate the Japanese
economy further directly and deeply. What we must not miss is the fact that this
crisis has been originally accelerated by the U.S. as a dominator of Japan
through its policy towards our country.

The Japanese government accepted financial liberalization and globalization
of the country according to the report of the Japan-U.S. Commission on Yen and
Dollar in 1984 and allowed a sharp appreciation of the yen in line with the
agreement of the Group of Seven financial ministers' conference at the Plaza
Hotel in New York in 1985. Consequently, it incurred a fierce 'bubble economy,'
with inflating bank credit through an all-out loosening of the money market.
After the burst of the 'bubble economy,' there remained a huge amount of bad
debts. These debts have heavily affected business operations of the financial
companies and underlie the present financial crisis.

In the deregulation of the financial industry - dubbed the Japanese Big Bang
- to be completed by 2001, it is not surprising that the Japanese financial
business with lower managerial ability will disappear as losers. This will pave
the way for domination of the country's economy by the US financial companies.
In the Tokyo Stock Exchange, some foreign-based securities companies have
already exceeded the local Big Four securities companies in terms of stock
dealings. They have also started their schemes to purchase some local financial
businesses and watch vigilantly for 1,200 trillion yen of individual financial
assets in the country.

A report on the US strategy toward Japan, issued in 1990 by the US Central
Information Agency, stresses that the US should deprive our country of financial
market with its own financial capability as a weapon. Taking advantage of its
financial skills, the US undertook the world strategy of controlling the global
market. On the other hand, Japan with huge bad debts expanded its loans to other
Asian countries in the traditional manner. While this has spread 'economic
bubbles' to the region and widened over-production, Japan is faced with the
economic failure of those countries.

The government is planning to use 30 trillion yen of public funds for salvage
of crisis-ridden financial companies. According to its plan, it will issue 10
trillion yen in bonds to strengthen the Deposit Insurance Corp., and guarantee
the Bank of Japan's special loans to the tune of 20 trillion yen. On the other
hand, it is shifting all the burden of relief measures onto the backs of the
working people. With all these measures, the financial crisis is deepening and
inviting far bigger over-production and financial crisis.

From: 'The People's Star', International Bulletin of the
Communist Party of Japan (Left), January 1998.